Troika loans to Greece: a gift for creditors, not for people

A new briefing by Attac Austria analyses who is benefiting from the crisis loans to Greece. At least 77% of the €206.9 billion loans by the Troika of the International Monetary Fund (IMF), European Union and European Central Bank (ECB) were used to bail out creditors and recapitalise banks. At the same time, the Greek economy collapsed and poverty is rising dramatically because the government lacks the financial resources to stimulate growth and fulfil its human rights obligations. The analysis confirms that Troika involvement in Greece is not benefiting the people but the creditors, repeating a history of debt crisis management we have seen in many developing countries in the past.

Crisis lending to Greece: who profited?

The Troika’s crisis loans, of which €206.9 billion has been actually disbursed in 23 tranches, turns out to be the biggest cross-border bail-out package ever given. The Attac briefing suggests that those who eventually benefited from loans were among the culprits of the crisis: aggressive speculators who successfully exercised political pressure that determined the use of the loans. According to the Attac analysis:

€101.33 billion (49%) went to creditors of the Greek state. €55.44 billion of these were used to repay maturing government bonds – instead of letting the creditors bear the risk for which they had received high-interest payments before.

€58.2 billion (28.13%) was used to recapitalise Greek banks – instead of restructuring the too big and moribund sector in a sustainable way and letting the banks’ owners pay for their losses. Another €34.6 billion of this sum served as an incentive to make creditors agree to the so-called ‘haircut’ in March 2012. €11.3 billion was used in a debt buyback in December 2012, when the Greek state bought back almost worthless bonds from its creditors. €0.9 billion (0.43%) was used as a Greek contribution to the new bailout fund (European Stability Mechanism).

Just €43.7 billion (22.46%) went into the national budget, although this figure is probably lower because it includes the share of loans that could not be definitively attributed.

Debt levels less sustainable than ever

One of the declared goals of crisis lending, as stated by the IMF, was to get Greece back on the path to debt sustainability, reducing the debt-to-GDP (Gross Domestic Product) ratio to 124% by 2020 from 156% now and to substantially below 110% of GDP by 2022.

This failed in a most predictable manner. Since the money went mainly to foreign creditors rather than to the local economy, Greece fell into a deep recession. With GDP contracting by at least 20% since the first troika programme in 2010, and a still rising external debt, the debt-to-GDP ratio has now reached about 160% – as opposed to 120% three years ago, before the first loan contract was signed. The drop in GDP implies that Greece’s debt levels are less sustainable than ever. The research by Attac confirms what even the IMF has acknowledged in the meantime. Debt sustainability in Greece will not be achieved without substantial debt relief, as the Troika loans – including the IMF share – have been used to fund the capital flight of exiting private creditors.

Impoverishment and deindustrialisation

The crisis lending came under the condition of Greece implementing an extremely harsh structural adjustment programme, similar to IMF programmes in developing countries many decades now. The sweeping cuts in wages and salaries, rising unemployment, privatisations and the reduction in spending for public good provision such as health and education have caused a rapid and massive deterioration of living conditions and an unprecedented humanitarian crisis, as confirmed by a report of the United Nations’ Independent Expert on foreign debt and human rights. On many occasion, the Troika has directly intervened in the sovereignty of the country, pressuring for reforms and commenting on internal policies and democratic procedures (referendum, elections etc.).

The effects of the structural programmes imposed by the Troika and implemented by the Greek government have been among the most severe and hard hitting in global history, not only for the Greek people but also for the Greek economy. Just one indicator is Greece’s recent downgrade from developed to emerging market status by the index provider MSCI, the first downgrade of that kind ever. The €206.9 billion that the Troika institutions provided could have mitigated the social impact of the crisis and put Greece back on a path towards growth and development. The decision to use them for creditor bail-outs instead is responsible for the massive impoverishment and deindustrialisation that has happened and is still happening now.

Lessons learnt by IMF, EU and ECB

The IMF recently admitted the failure of the latest debt restructurings, citing Greece as a prime example, and recognised the need for reforms in debt crisis management. It concludes from the recent experiences that debt restructuring mechanisms need to be revised, and mentions the option of moving towards a fair and transparent arbitration process. However, it is still far away from a decision to do so.

Moreover, in the last evaluation of the progress, the IMF takes co-responsibility for bad programme design based on wrong assumptions and miscalculations, and states that a debt restructuring should have happened earlier. Less critical reflection is seen from the other institutions involved in the Troika, which might be because powerful players in their constituency benefited from the bail-outs as the de facto recipients of money made available through the loans such as German banks.

A political agreement on these has just been reached by the European Council, including a new proposal for bailing-in private bank's shareholders, bondholders and large depositors first before public money or money from 'deposit guarantee funds' are used. However, the Council proposal still requires legislation by the European Parliament and it will not take effect until 2018. What happens until then is still unclear. In the meantime, there will be attempts from financial sector lobbyists to water down the proposal further. The regulations include numerous exemptions already and some EU Member States might claim more room to manoeuvre. Whether EU citizens will ultimately benefit from this will depend on the clarification of and adherence to the new directives, and on vigilance towards people's economic and democratic rights."

Although the austerity-inducing loans were being portrayed as a ‘rescue package’ supposed to support the Greek people and economy, in reality they primarily supported a small elite of bankers, wealthy investors and international hedge funds. This grand embezzlement could have been avoided if major debt cancellation had been conducted earlier.